Trade Solutions

Mastering the Supply Chain Finance Puzzle — Five Critical Pieces

Michael Stitt
Executive Director, Trade and Supply Chain Sales, North America
J.P. Morgan

It seems that everyone loves supply chain financing (SCF) these days. You could even say it’s a winning proposition — suppliers appreciate the access to affordable liquidity, visibility into payments, and the opportunity to drive working capital improvements, while buyers use it as a tool to streamline the payables process for trade-related invoices. However, attaining these desirable outcomes is a far from simple proposition. Global firms could accelerate their path to achieving these benefits – and amplify the positive results – if they asked certain key questions earlier in the process, better understood whether SCF was a good fit for their strategic working capital needs, and properly organized for success. There are five critical pieces of information that, if collected and evaluated, can be fit together to create the most appropriate program for buyers and their suppliers.

Piece 1: Clearly identify SCF goals

The most elementary step when embarking on any project is to clearly understand and communicate the desired outcome. With SCF, you may adopt a buyer-oriented strategy to primarily deliver benefits to your organization without hurting your suppliers, such as standardizing terms so as to drive operational efficiencies or extending terms to push out payables/DPO in order to drive working capital efficiencies. On the flip side, you can have a supplier-oriented strategy that supports suppliers with minimal impact, such as providing access to affordable liquidity or transparency into payments. Or you can combine elements of both approaches that balance working capital saves for you while delivering better supplier relations and enhanced viability of strategic parts of your supply chain. Identifying the appropriate balance for your organization will help to determine which SCF levers you want to pull.

Piece 2: Socialize among impacted parties

It’s important to move decisively to create or enhance dialogue among internal teams impacted by a SCF program. A successful SCF program involves the cooperation of multiple constituencies – Treasury, Procurement, Accounts Payable (AP) and Technology – who can have diverging incentives and objectives. Treasury, for example, tends to favor suppliers with less risk in terms of viability, currency, payment and country. Procurement, on the other hand, may be seeking inexpensive, conveniently located supply sources. AP wants to pay in the company’s “home” currency, avoiding exchange rates and fees, and Technology’s goal is to avoid disruption to overall systems. All are managed under different goals and metrics, which are sometimes at odds.

To get the dialogue started, Treasury representatives should guide the education and discovery process due to their inherent roles in executing working capital strategies, funding of the corporate balance sheet, and managing relationships with external capital providers. Once SCF is determined to be a strategic program helping to meet working overall corporate financial objectives, Procurement should be consulted to establish a broad basis for cooperation. An executive sponsor should either have oversight over these teams, or be a senior representative from one of these teams, empowered to act across organizational lines, and charged with building consensus, and demonstrating the firm’s commitment to meeting strategic goals.

The firm needs to carefully consider when AP and Technology should be brought in to the discussion, as both are stakeholders; however, the overall decision should rest with an agreement between Treasury and Procurement. Once this is reached, AP can help understand the firm’s overall spend while Technology can determine the overall impact to systems.

It’s important to recognize that these negotiations can be difficult, and firms can call on their banking partner to share past experience, provide communications materials, and help ensure that discussions do not get derailed.

Piece 3: Consider bypassing the formal RFP

The first step companies often take when looking at strategic projects is to issue an RFP, but SCF is not well-suited to this process. SCF is credit and relationship driven with difficult-to-measure qualitative factors such as implementation capabilities proven to be critical to success. A strong partner bank, by leveraging their cross-business relationship and insight into the firm’s structure, objectives, and strategic needs, should be able to collect critical data points, conduct analysis, and present a qualified proposal that steers the development of the most appropriate SCF program for you and your suppliers.

A properly communicated and structured program may not need an RFP, or the considerable costs in time, effort and people involved. Often, RFP documents are too broad and don’t take into account other required activities such as formal credit inquiries and the crafting of non-disclosure agreements. The standard RFP process utilized by Procurement with rigid cost-focused guidelines is not suitable for an SCF solution because the firm runs the risk of soliciting inappropriate responses from vendors that don’t know your business and with which you may not have a trusted relationship, and result in the presentation of unworkable solutions.

Regardless of your decision to issue a formal RFP, you should never rely solely on a paper-based response. Insist on a face-to-face, interactive presentation of the actual solution which opens the floor for a nuts-and-bolts discussion of technology requirements, buyer and supplier experiences, and the communication strategy utilized by your bank to onboard suppliers. This is a strategic initiative, and it is critical that you have confidence in the plan and those tasked to deliver it.

Piece 4: Provide specific details

Supply Chain Finance is a strategic working capital management solution, and touches on firms’ capital structures and their relationships with suppliers. As such, intimate, possibly sensitive, details need to be shared in order to structure the most appropriate program for you and your suppliers. Basic details such as legal entities, geographies, currencies and funding sources are critical. For some banks, funding different currencies is a challenge; others may have comparative advantages.

You should also review the markets in which suppliers reside, the buying firm’s legal entities involved, and the existing legal agreements and credit support structures between parents and subsidiaries. If a parent will not provide credit support to a foreign subsidiary, this affects both credit pricing and capacity – and the higher the pricing, the less penetration of suppliers can be expected.

Large corporate and multinational firms have multiple buying entities that may be geographically dispersed across the globe; hence the provider will need as detailed a briefing as possible relative to the supply relationships these units maintain and are seeking to grow. This should include details about the flows of purchasing between their entities and suppliers so the provider can map what is often a very complex web of relationships. For example, let’s take the case of a buyer with 10 entities in 10 countries, with 1000 suppliers in 30 countries. Often these suppliers may be supplying more than one of those entities, and these many-to-many relationships impact on the ground onboarding requirements and also on the credit structure of any solution.

Piece 5: Understand the timing requirements of your bank

As a buyer, you need to allot adequate time to the SCF proposal process. Why so much time? Providers need to structure a program customized to the firm’s needs, including credit, business, and compliance approvals, among others. The time required is not due to banks’ inefficiency; in fact, this cautious approach reflects regulatory considerations regarding good business practice to incorporate thoughtful recommendations on the most appropriate structure for your business.

Solve for success

Once all the pieces have been collected and analyzed, you can begin to evaluate and select the SCF program that best fits your needs and the needs of your suppliers. In more than 20 years of vendor financing and SCF program experience, the most successful programs I have seen are the ones that took the time to carefully identify program goals, gather the appropriate internal constituents, collect critical details, and work closely with a qualified banking partner. Taking a strategic approach to program planning and evaluation will also allow you to move quicker from initial concept to program execution – a successful solution for everyone.

About the Author

Michael Stitt is an executive director in the Global Trade team at J.P. Morgan. He leads the Trade and Supply Chain Finance sales team for North America covering the consumer products, retail, healthcare and diversified industry sectors, and develops comprehensive trade solutions and structures for J.P. Morgan’s large corporate clients. Prior to joining J.P. Morgan in 2010, Mr. Stitt served in a similar capacity at Wells Fargo and predecessor institutions First Union and Wachovia. He began his banking career in 1991 as a corporate banker for the HSBC Group where he helped establish the Wells Fargo HSBC Trade Bank, an equity joint venture between Wells Fargo and the HSBC Group, and worked as one of the bank’s first relationship managers.

Mr. Stitt earned a B.A. in economics from Northwestern University in Evanston, Illinois, and a master’s degree in international management from the Thunderbird School of Global Management in Glendale, Arizona.

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